International Financial Reporting Standards (IFRS): overview of studies
There have been several researches into the adoption and harmonization of IFRS in EU countries due to the nature and importance of the topic.
Street and Shaughnessy (1998) mentioned about several differences between the international reporting standards and reporting standards of major Anglo-American countries.
The difference between harmonization and standardization has been analysed by McLeay, Neal and Tollington (1999) and they presented a method to measure harmonization that allows for choice between alternative accounting treatments.
Further studies were carried out by Murphy (2000), Van der Tas, (1998) to identify the compliance with IFRS by selected companies by analysing the annual reports of companies from different countries.
The early adopter, who adopted IFRS before 2005 optionally were evaluated by group of researchers (Street and Gray, 2001; Taylor and Jones, 1999) and they found out that different companies financial statements showed different levels of usefulness by applying IFRS.
Street and Gray (2001) selected a sample of 279 firms that used IFRS in preparing their financial statements. And the research found out that in most cases, disclosed accounting policies were not consistent with IFRS.
Another important finding by Schultz and Lopez (2001) suggest that uniform international accounting standards may not result in uniformity among countries especially when the standards allow for significant discretion.
Jermakowicz and Tomaszewski (2006) carried out research into the quality of IFRS compared to GAAP and found out two reasons as why reporting under IFRS does not provide higher accounting quality. One of the reasons for their argument is because of domestic standards that limit managerial discretion relating to accounting alternatives. They argue that limiting managerial discretion relating to accounting could eliminate the firm’s ability to report accounting measurements that are more reflective of its economic position and performance. Another reason is the inherent flexibility in principles-based standards that could provide more opportunities for firms to manage earnings thereby reducing accounting quality.
Moreover, studies by Van, Tendeloo and Vanstraelen (2005) showed no significant differences between reporting under IFRS or domestic reporting standards. They found out that German companies applying IFRS do not have differences in earnings management. And Daske (2006) also supports this findings by claiming that German companies reporting under two reporting standards does not show any evidence in reduction in cost of capital.
Furthermore, Echer and Healy (2003) also studied the differences arising from reporting under IFRS and Chinese national reporting standards and concluded that there were not any differences identified in terms of value relevance.
Ball (2006) studied the focus of IFRS on investors, as IFRS tends to focus more on investors rather than overall stakeholders in companies. He found out the following advantages of IFRS on investors:
IFRS simplifies the presentation and interpretation of financial statements so that even a non-accountant can understand them, which gives opportunities to investors to analyse the statements without the need for a professional to interpret financial statements for investors, which both reduces the fees and time needed to make investment decisions.
Moreover, as long as financial statements prepared under IFRS is simpler than GAAP, risks associated with investment decisions is also reduced as investors can have a bigger picture about the company’s performance before making any investment decisions.
Further studies by Perramot and Amat (2007) on the effects of IFRS on Spain’s listed companies indicate that the introduction of international accounting standards may influence the profit results of listed companies mainly due to the application of fair-value for derivatives instruments and new rules of accounting for goodwill. Moreover, they also state that the application of IFRS in Spain has a diverse effect on the net profit and this does not depend on the profit rate and total assets of the companies.
Another research carried out by Verhoef, Develi, Lopes and Lalou (2007) studied the need for harmonization or standardization of IFRS globally and they concluded that accounting standards can generally be harmonized, but not standardized due to significant political and economical factors within countries. And in the future, it can be expected that these national standards may incorporate the differences and further harmonization will be achieved by eliminating the differences.